Cisco’s CEO on Staying Ahead of Technology Shifts

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Executive Summary

In his youth Chambers had no interest in technology—until an IBM recruiter suggested that he think of it as a tool for helping customers transform their businesses. Then stints at IBM and Wang taught him that even great companies are imperiled if they miss a market transition, such as the shift from mainframe computers to minicomputers or from minicomputers to PCs. In the 20 years since he became Cisco’s CEO, a whole series of transitions have occurred in the kinds of technology companies rely on and in how organizations consume solutions. Anticipating those transitions and getting ahead of them has driven Cisco’s evolution from routers and switches to mobile and video technology to application-centric infrastructure and cloud computing.

The company has three ways to adapt. (1) If it sees a shift early enough, it develops the new technology in-house, as part of the traditional R&D process. In addition, its Entrepreneurs in Residence program financially supports and mentors early-stage entrepreneurs working in areas where Cisco sees huge potential, such as big data analytics and enterprise security. (2) It may make an acquisition—as it has done 174 times. (3) It may use a “spin-in,” assembling some engineers and developers to work on a specific project outside the company, as if they were at a start-up.

“You have to be bold,” Chambers writes. And you need “a resilient culture with an appetite for change.”

HBR Reprint R1505A

Jeff Singer

Our success at Cisco has been defined by how we anticipate, capture, and lead through market transitions. Over the years, I’ve watched iconic companies disappear—Compaq, Sun Microsystems, Wang, Digital Equipment—as they failed to anticipate where the market was heading. Today we’re navigating several fundamental technology transitions, including cloud computing, mobility, and the internet of everything. These transitions force us and our customers to think about data, security, and business models differently. That means making tough decisions and immersing ourselves in a process of disrupting the market and at times ourselves. When you’re a large company with significant market share, it’s tempting to view market disruptions as a threat, but we view them as an opportunity. When a market isn’t in transition, gaining market share is hard—you’re fighting to take one or two points of share from competitors. That’s why we’re transforming our entire business, expanding to capture growth, and thinking very differently about the future of information technology.

Missing Important Changes

I wasn’t always interested in technology. I had been a student for a long time—I’d earned a bachelor’s degree, a law degree, and an MBA—and decided that I wanted to work in a large corporation focusing on finance and law, in either New York or Chicago. But a friend of mine was at IBM, and part of his performance review was based on how successful he was at helping to recruit. He started talking to me about a job, but I told him I wasn’t interested. I thought to myself, I didn’t go to college for nearly 10 years to be a sales rep! Then he offered tickets to a basketball game, and because I’m a huge sports fan, I accepted.

After the game my friend’s manager also talked to me about working at IBM. I told him I wasn’t interested—I actually considered the field kind of geeky. He said that was the wrong way to think about it—instead I should look at the job as helping customers transform their business. Technology just happened to be the tool used in that transformation. The way he described it appealed to me. Eventually I joined IBM as a sales rep and ended up spending six years there.

From IBM, I went to Wang, where I had the chance to work with An Wang, the company’s founder and the most brilliant man I’ve ever met. He invented key parts of the computer industry and built a large, very successful company.

The most important thing I learned during my time at IBM and Wang is that even great companies are imperiled if they miss a market transition—and I saw both of them miss important ones. IBM was slow to identify and adapt to the shift from mainframe computers to minicomputers. When it tried to build a minicomputer, it wound up with one that worked like a mainframe—it was so complex that it lacked the advantages of a minicomputer. That happened because IBM managers had quit listening to their customers. The same was true at Wang, which missed the shift from minicomputers to PCs. Wang actually built a PC a few years before IBM did, but built it like a minicomputer. It didn’t focus on software or applications. At IBM, I watched friends get laid off. At Wang, where I was a manager, I oversaw five rounds of layoffs during a period of 18 months. It was a painful time, but I learned what happens when companies lack the courage to disrupt themselves.

After I left Wang, I got in touch with friends and people in my network, and four months later I was talking about opportunities at 22 companies. One of them was Cisco. I was told it needed someone who understood how to scale the enterprise and identify market transitions. I knew there was a great future in networking equipment, because the internet seemed ready to take off. I joined in 1991 as the senior vice president of worldwide operations, and in 1995 I became the CEO.

When to Make the Leap

In the 20 years since then, a whole series of shifts have occurred in the kinds of technology companies rely on and in how they consume solutions from Cisco and other suppliers. Anticipating those transitions and getting ahead of them has driven our evolution from routers and switches to mobile and video technology to application-centric infrastructure and cloud computing.

Back in the 1990s internet traffic was routed through fiber-optic cable. Within a few years the industry had shifted to switching technology, which allowed more data to travel through the same cable. In telephony the market shifted from analog to voice over internet protocol (VoIP), which allowed companies to send phone calls on the same network they used for computer data. Lucent, Nortel, Alcatel, and other companies missed that shift and were left behind. Think about how the internet has expanded from a medium for e-mail to one for web pages and then streaming video—and how users have shifted from desktop computers to smartphones and tablets for accessing all that information. Now think about the shift from owning server farms to outsourcing to the cloud. More recently, the internet of everything, which is the explosion of connections across people, processes, data, and objects, has put demands on business to create new communication channels for new kinds of devices.

Some of these changes required consumers to buy new devices. All of them required companies to make big investments in technology. Those that didn’t were, once again, left behind. For Cisco, each transition required a decision about when to jump from selling a profitable product to a new technology—often one that would cannibalize our existing product line. These jumps were critical, though, if we wanted to stay ahead of the curve.

The best indication of when to make the jump frequently comes from our customers. That’s been true in nearly every market transition. Many years ago, before the market moved from routing to switching, I visited Ford Motor Company, a key customer. Executives there told me they were exploring a new networking technology called Fast Ethernet. I’d never heard of it before. A week later I called on some Boeing managers, and I asked them about Fast Ethernet. “Yeah, we think that might be the way to go,” they said. They told me about a company called Crescendo Communications that was making advances in that area. We ended up buying Crescendo to help us make this transition. Similarly, as the market moved toward wireless, customers told us to buy Meraki, a maker of Wi-Fi networking gear, which we did. In many other instances customers helped us spot a market shift and pointed us toward a new technology that would be useful in making the leap. That’s one reason I spend so much time listening to CIOs, CTOs, and CEOs during sales calls.

A Start-Up Mentality

When we’re confident that a market is going to shift, we have three ways to adapt. If we see the shift early enough, we can develop the new technology ourselves in our traditional R&D process. We spend close to 15% of our revenue on R&D. Additionally, we have our Entrepreneurs in Residence program, which provides financial support, mentoring, and collaboration opportunities to early-stage entrepreneurs working in areas where we see huge potential, such as big data analytics, cloud computing, and enterprise security—all with the hope of bringing some of their ideas to reality and implementing them in our business. Alternatively, we may make an acquisition. We do that often. In fact, we’ve done 174 acquisitions. Back in the 1990s the conventional wisdom was that acquisitions in the tech industry generally fail. But we’ve been successful with most of ours.

The third way we adapt is by using what we call a “spin-in”: We assemble a group of engineers and developers to work on a specific project and move them out of the company, as if they were at a start-up. We have a project like that going on now. It involves 280 employees, and they’re building a multibillion-dollar business for our future. We incentivize them with financial rewards if they hit objectives. That helps them develop a real start-up mentality and gives them a unique ability to recruit new talent. We measure their progress closely; this group is off to a great start. When the project is complete, we’ll move its members back into the main company. These engineers and developers help us bring innovative products to market quickly, but differently from our peers.

Moving Beyond Dial-Up

Prior to 2000 Cisco primarily sold routers and other gear that helped power the internet. But as dial-up modems gave way to broadband, smartphones, and other new technologies, the company dramatically shifted its focus to navigate through five distinct transitions:

Mobile

Cisco acquired Airespace in 2005, accelerating its leadership in Wi-Fi.

Video

Cloud Computing

Cisco introduced the Unified Computing System in 2009, making it the number one choice for virtualized computing environments.

Application-Centric Computing

Cisco introduced Application Centric Infrastructure in 2013, allowing systems to be managed across a common operational model.

Internet of Things

Early in 2013 Cisco launched a brand campaign and established a dedicated engineering group to focus on timely solutions.

Geography can play a part in spotting market shifts as well. One reason Wang and Digital Equipment failed is that they were in the Boston area, where most of the minicomputer companies were located. When I worked there, I thought every major computer company in the world was located along Route 128—and that view is part of what led the industry to miss the market shift to PCs. It has happened to other companies, too. Bill Gates has said publicly that part of the reason Microsoft was slow to adapt to the internet was that its headquarters are in Seattle rather than Silicon Valley. Being two states to the north made all the difference in not spotting that market shift. You need a certain kind of culture to adapt quickly to market changes. Sometimes it requires the courage to change your leadership team. When I became CEO, I had 11 people on my team; I knew that within a few years only one or two of them would still be at Cisco—and that’s what happened. We’ve had seven heads of sales during my time here. We’ve had six CFOs and six heads of engineering. Adapting to new markets means constantly bringing in new expertise and sustaining a resilient culture with an appetite for change.

You Have to Be Bold

We don’t always spot market transitions correctly. Sometimes we’re too early. For instance, we began working on the internet of everything more than seven years ago. The market wasn’t ready for it. In that instance we had the courage to keep going without overinvesting to the point where we were betting the company on it. And sure enough, eventually the market came around.

In the fall of 2013 we held a conference at which everyone suddenly wanted to talk about connecting new kinds of devices and appliances to the internet and collecting new kinds of data. By the time the 2014 Consumer Electronics Show rolled around, the internet of everything was the topic, and Cisco stole the show. Now we’re spending a lot of time talking to cities and countries about how they can use internet data collection to function more efficiently and be better places to work and live. We’re already seeing results in cities such as Chicago, Barcelona, Nice, and Hamburg. Each city has unique needs, so the solutions we implement vary; but generally speaking, using data from connected devices and implementing technology such as smart parking and smart street lighting are helping to cut costs and improve the quality of life in those cities. And that’s just the beginning. Countries are also taking advantage of digitization and the internet of everything to create jobs and new opportunities for innovation, as well as to improve GDP, with France, Germany, and the UK leading.

At other times we have the right idea but we make a mistake in execution. The example I’m criticized for most often is Flip, the mini-video camera. We acquired the company that made it in 2009, as part of our move into consumer products. Shortly afterward Steve Jobs held up the Flip at one of his product unveilings and announced that the iPhone would shoot high-definition video. It wasn’t just adding video capability to the iPhone that disrupted the Flip—it was also the iPhone’s ability to easily upload the video into the cloud. I believe that if we’d introduced that share capability for all smartphones before Apple did, the Flip acquisition would have been successful. But we didn’t move quickly enough, and the damage was done. To our credit, we had the courage to shut the Flip down.

Disrupting yourself can be really difficult. For instance, in 2014 we announced plans to realign 6,500 people, driven by our need to focus on growth areas such as cloud computing in order to adapt to what we saw as the next big transition in the market. After watching the head count at Wang go from 32,000 to zero, I’d hoped never to do another layoff. Nothing can prepare you for the pain suffered by families, customers, and shareholders. But in this case we had to move so quickly that attrition wouldn’t have gotten us where we needed to go. We finished 2014 with about the same number of employees we started with, and we’re stronger than ever.

As I mentioned before, I’m a huge sports fan, and I think our approach to reaching the goal of becoming the number one IT company is similar to football in many ways. It’s all about finding the hole in the line. Right now some companies have left it open because they’ve gotten comfortable with their traditional business models and are afraid to change. At Cisco we’re thinking about IT in a different way, by putting customer outcomes at the center of everything we do.

By the time it’s obvious you need to change, it’s usually too late. Very often you have to be willing to make a big move even before most of your advisers are on board. You have to be bold. And you need a culture that lets you figure out how to win even without a blueprint. That’s how we’ve always done things at Cisco.

A version of this article appeared in the May 2015 issue (pp.35–38) of Harvard Business Review.